(FORTUNE Magazine) – I am kneeling, awkwardly, in front of a sheikh. We are at an encampment in the desert near Riyadh, where a member of the royal family of the Kingdom of Saudi Arabia is receiving petitioners--Saudi citizens, many down on their luck, who need a favor, usually in the form of cash. It is evening on a nearly moonless night, and the desert has gotten quite cool. (The new moon the next evening would mark the official start of Ramadan, the holiest month in the Islamic calendar.) I'm thankful that it's a bit warmer inside the tent. The only covering I had brought with me was a New York Yankees warm-up jacket, attire I decided was probably not appropriate for this occasion.

The sheikh in question--he identifies himself only as Faisal--is the head of a tribe that numbers 50,000, which means that, though he is not a member of the House of Saud, the family that has ruled this country for nearly three centuries, he has some clout. Several of his tribe are among those who have come to petition the Prince, and he sits on the vast floor covered with carpets, his back to the wall, watching the proceedings.

I ask him about the war in Afghanistan; about Osama bin Laden; about the anti-American sentiment that is supposedly mounting in the kingdom and throughout the Middle East. He sighs in response to the questions, as if they pain him. "You can't avoid the war," he parries. "It's all over the television all the time." Is there great sympathy for bin Laden? "No," he says, "not really. Most people understand that what happened is a terrible thing." Finally, I ask if there is a risk of instability in Saudi Arabia.

The country's economy is weak and still too dependent on oil, whose price is again cratering. Young Saudis, increasingly trained in Islamic schools that teach the austere brand of Islam that produced bin Laden and his followers, have a harder time finding good jobs. And the number of young people in the kingdom--nearly 75% of a population of about 20 million is now under 30--is daunting. It all sounds precarious, and makes you think you wouldn't want to be in the flowing robes of Crown Prince Abdullah, the de facto head of state. Having effectively taken over from his brother King Fahd, who suffered a stroke a few years ago, he has been dealt a mess, and now has a war raging against a regime that, until a few years ago, the kingdom supported (it was one of just three countries to formally recognize the Taliban).

Sheikh Faisal looks at the translator. Behind his thick, square, black-framed glasses, he looks back at me as if I'm from another planet (and this is without the Yankees jacket). "I don't think," he says, "that there is the slightest chance that there will be instability in Saudi Arabia."

Of the countries "in play" since Sept. 11--those whose futures matter more to the rest of the world than any others (to be blunt, landlocked, resource-poor, impoverished Afghanistan is not one of them)--two stand out. One is Pakistan, which has nuclear arms and formerly sponsored the Taliban regime. Pakistan is also home to its own virulently fundamentalist movement--people and political parties who seek the imposition of an Islamic state--and those ranks will no doubt soon be joined by thousands of routed Taliban fighters fleeing Afghanistan. They will not be well disposed to President Musharraf, who sold them out to join the U.S. coalition in the pursuit of bin Laden. Instability in Pakistan, and the possibility of the "Islamic bomb" falling into the hands of angry jihadi, is the stuff of genuine nightmares.

The second country of consequence is Saudi Arabia. And the reason for that, as everyone knows, is oil. Saudi oil is why the U.S. fought the Gulf war. It's why the U.S. still has some 5,000 troops stewing in the desert south of Riyadh. It's why 19 of their brothers and sisters were blown up in 1996, when terrorists attacked the al Khobar barracks.

The Saudis have more than 25% of the world's proven reserves. They are the biggest producer and the biggest exporter, and though the U.S. buys more oil from Canada these days, we are the Saudis' biggest export market. They need us, and we need them. It is a marriage rooted in nothing more than the geological accident that, millennia ago, put more hydrocarbons under this desert than in any other place in the world.

You can curse your luck and rail at the gods, or you can deal with reality. And ever since Franklin Delano Roosevelt gave Abdul Aziz, King Fahd's father, his word that America was a friend (and defender) of the kingdom, the U.S. has dealt with reality. Through thick and thin it has cultivated the kingdom's rulers as "moderate" allies in the Arab world: from the Nasser era of pan-Arab nationalism to the Six-Day War in 1967 to the Iranian revolution to the liberation of Kuwait. And through it all, as Prince Turki al Faisal, the former head of the GID, the Saudis' version of the CIA, said in an interview, "we proudly flaunted our friendship with the United States."

But nothing has tested the relationship between these two countries the way Sept. 11 has. It is not simply that bin Laden is a Saudi, or that 15 of the 19 hijackers who attacked the U.S. were Saudis, or that, prior to 1998 at least, the Saudis had deep ties to the Taliban regime that harbored bin Laden and the rest of al Qaeda's high command. Since Sept. 11 has come a wave of stories in the establishment press in the U.S. that have portrayed Saudi Arabia in a brutally unflattering light. It was accused of not cooperating fully with the pursuit of bin Laden's financial network; of impeding the investigation into the hijackers; of not allowing the U.S. use of the highly sophisticated Prince Sultan air base (built by the U.S.) as a key command-and-control center in the war in Afghanistan.

Then came reams of copy about Saudi financing of Islamic schools in Pakistan, called madrasahs, whose students, as Jessica Stern, a former staffer on Bill Clinton's National Security Council puts it, become "canon fodder for the jihadi"--the Islamic warriors who will carry on bin Laden's anti-American campaign even if, by the time you read this, his corpse has been dragged out of a bombed cave in southern Afghanistan. As if that weren't bad enough, the Saudis' own educational system, the stories pointed out, is increasingly dominated by Islamic schools and universities, with textbooks that contain passages like this: "It is compulsory for the Muslims to be loyal to each other and to consider the infidels their enemy." Reading this, who in the U.S. would not be thinking, "With friends like these..."?

Combine all this with two undeniable facts--that the Saudi economy has serious problems and that there is a level of discontent among the Saudi populace about, among other things, chronic corruption by the royal family--and you get otherwise intelligent people like economist Paul Krugman concluding in the New York Times that "everyone now realizes" Saudi Arabia is "another Afghanistan" waiting to happen.

Time out. Everyone take a deep breath. Afghanistan? The analogy more commonly used is Iran in the 1970s--a corrupt, repressive, oil-rich dictatorship central to U.S. security concerns in the Middle East is overthrown by radical fundamentalists. But even that, as we'll see, appears to be a deeply flawed comparison.

To be sure, a two-week swing through any country, particularly one as paranoid and secretive as Saudi Arabia, cannot answer all questions. But it can answer some. Start first with some of the fleeting, post-Sept. 11 accusations about a lack of cooperation in the investigation and the alleged reluctance to let the U.S. use the air base that it built. A senior Saudi official, who did not want to be identified, says that in the wake of the attack, "hundreds" of Saudis in the kingdom have been detained for questioning. Similarly, all the assets associated with Saudi nationals or charities suspected of helping to fund bin Laden, this source told me, were frozen, and to date no one from the U.S. Treasury has been in Riyadh to pursue the matter further. And as for the alleged nonuse of the air base, "on the day that story appeared in your press, 220 uniformed servicemen of the United States military were at the Prince Sultan air base." In informal conversations with several Western diplomats, no one disputed any of this.

All of which is not of great consequence. The fact is, if the Saudis had been the reluctant partners they have been accused of being, the U.S. would have grumbled about it but then gotten back to business. What really matters is the kingdom's long-term stability, and here the issues of fundamentalist religion and economics are central. To say that Saudi Arabia is unlikely to be the next Iran, let alone Afghanistan, is not to say that the House of Saud doesn't preside over a country with serious, and deepening, problems. It does.

It is the first day of Ramadan and the devout pour into the mosque in Riyadh's main square. This is the infamous "chop chop" square, where every Friday (though not during Ramadan) the Saudis mete out justice publicly: Murderers are beheaded, thieves lose hands, etc. The U.S. has ignored pleas from Saudi Arabia and other Islamic countries to cease bombing during the holiday, but today there is no fire and brimstone from the imam preaching at the mosque. He speaks mainly of how to be a good Muslim during the holy month.

That is not altogether surprising. The day before, in a nationally televised meeting with his country's senior clerics (known in Saudi Arabia as ulema), Crown Prince Abdullah made a direct appeal to his audience both at the palace and beyond: "Brothers," he said, "you know we are going through difficult days. You should be cautious and gently advise your brothers. It is your duty to weigh each word before saying it, because you are responsible before God and the Muslim nation. If you are rational, we can discuss everything. But don't do anything to harm this religion."

That the context for these remarks is Sept. 11 is obvious but unstated. In the days since the attack--and even before--not all the rhetoric flowing from the mosques in Saudi Arabia has been "rational." Far from it. One Saudi columnist wrote recently of an argument he had gotten into with a friend over whether a sermon that called for the "annihilation" of Christians and Jews constituted "heresy."

The House of Saud and the Sunni sect known as Wahhabi are joined at the hip and have been for nearly three centuries. In 1744, the followers of a fierce cleric named Mohammed bin Abdul Wahhab allied with the al Sauds, and together they conquered the territory that today makes up central Saudi Arabia. For most of the years since, the descendants of both clans have ruled the kingdom.

No one in Saudi Arabia denies that the Wahhabi clerics play a critical role in their society. What I learned very quickly during my stay in the country, however, is that the characterization of Wahhabism as a "radical" force and, as such, a source of instability both at home and abroad positively drives the Saudis to distraction. Sitting at his desk in the splashy new King Faisal office complex in Riyadh (built by the construction company owned by the bin Laden family of Jiddah), Prince Turki al Faisal, the ex-spymaster, flashes a hint of anger only once, and it's when I raise this subject. "It is," he snaps, "pure hogwash."

It was going to take a lot longer than two weeks for me to figure out how the Saudis square their vision of Wahhabism--a "quieting, moderating force," as one Saudi businessman told me--with the anti-infidel rhetoric that sometimes comes from their mosques and that pollutes some of their textbooks.

What is clearer is that there is one place where, without question, the power of the clerics in Saudi Arabia is a problem, and that's in the schools. And that problem, in turn, flows through the economy in ways that could, in the long run, be dangerous. Simply put, one of the ways in which the al Sauds have kept the conservative clerics happy by allowing them to "hijack" the educational system, as one American businessman in Jiddah told me. "The education system has slipped here," concedes Prince Abdullah bin Faisal, CEO of the Saudi Arabian General Investment Authority, a key economic planning agency. "[The curriculum] has become classically and religiously oriented--and so out of touch."And why that matters leads directly to the economic conundrum in which the Saudis now find themselves.

If your image of Saudi Arabia is one of oil-rich sheikhs snapping up London townhouses, then a trip to the southwestern region of Asir will change that. Asir looks nothing like Riyadh. It is mountainous, and some of the small villages tucked into those mountains have been there for centuries. This is where some of the Sept. 11 hijackers were from, and by Saudi standards parts of Asir are downtrodden. Nationwide, per capita income in Saudi Arabia has plummeted, from a peak of $15,000 in 1981 to $7,700 in 2000, and it is places like the small villages outside of Abha that have felt it most. A young man I met in Asir did not want his name used, and it was clear why. He was openly critical of the royal family's profligate spending in an era when he and many of his peers are struggling. Like an increasing number of young Saudi men, he graduated recently from an Islamic studies program at a university, and now finds himself without a job. He has no technical skills and no particular interest in business. And menial work--waiting tables or construction jobs--is still mainly done by the five million foreign workers in the kingdom. Though some Saudis now toil in grocery stores or in other relatively low-paying service positions, too many, including the one I met in Asir, consider that kind of work beneath them.

In the mid-1980s, Saudi Arabia sent 12,500 students abroad annually to study. With the increase in the number of universities in the country, just 3,000 students received their degrees overseas last year. A great many more Saudis now attend university, but the problem, to hear employers talk, is that many of these homegrown institutions are dominated by conservative clerics, and they are turning out young men (to the extent that women in Saudi Arabia work, they tend to be nurses and teachers) who are not equipped for the modern workplace. As the businessman in Jiddah puts it, "These guys know Allah but not algorithms."

That matters, because the Saudis are once again learning that their dependence on oil is a problem. Oil revenue accounts for 75% of the nation's budget, 40% of its GDP, and 90% of its export revenue. After the demand for oil surged during the booming 1990s, the country is now back to reality: Demand is slumping, and Oil Minister Al Naimi, the most powerful figure within OPEC, is struggling to get the increasingly important non-OPEC producers like Russia to cut production. The result: Oil prices have plunged to a two-year low amid the global recession.

For the Saudis, the message is clear: They need to diversify their economic base in a hurry. If there ever was an era when the average Saudi really was so rich that when the Mercedes ran out of gas he just left it at the side of the road and bought a new one, it's long, long gone. A faintly comical remnant of that fairy-tale era is that the kingdom itself does not keep unemployment statistics. But Brad Bourland, the chief economist at the Saudi American Bank, estimates unemployment at no less than 20% of a work force that is overwhelmingly young.

It is here that the outlines of a nightmare scenario for the kingdom become visible. A generation of young men, already (by dint of their educations) more influenced than their predecessors were by fundamentalist clerics, find themselves unemployable. The royal family carries on with its legendarily lavish lifestyle. (One of King Fahd's sons recently built a palace in Riyadh modeled after the Alhambra, the Spanish castle.) Maybe a split develops within the House of Saud, between those (like Crown Prince Abdullah) who want to rein in the corruption and those who want the status quo. The ulema chooses sides. Is unrest out of the question? Is there not an "Iran" scenario out there somewhere?

If there is, we are still a long way from it. The government has taken some first, albeit fairly feeble, steps toward economic reform. Despite the fierce protests of the national oil and gas monopoly, Saudi Aramco, the government will allow Exxon Mobil and Shell to drill for natural gas in three separate regions--a signal that the Saudis are serious about attracting more foreign direct investment. On Dec. 16 the companies are expected to sign an agreement with the government nailing down the terms of the deal, which should allow the drilling to begin sometime next year. The government is also mulling what is, by Saudi standards, a fairly ambitious privatization schedule, hoping to sell off pieces of state-owned monopolies in telecommunications, power generation, and aviation. That could help ameliorate budget problems that have become chronic. If anything, says one Western diplomat, the economic slump could hasten the reform process, "because it illustrates there is no other way for them to go."

There are also three important facts to keep in mind about potential "crisis" scenarios in Saudi Arabia. One is that, for all the talk about the kingdom's economic problems, the level of poverty in the Shah's Iran was far greater than anything in the kingdom today. Two: The House of Saud and the clerics have effectively co-opted each other, so a massive Khomeini-like challenge to the ruling order seems unlikely, particularly since the ruling family still retains deep reservoirs of respect within the Saudi population and has withstood crises, both internal and external, before. Who remembers today that in 1975 King Faisal was assassinated by his nephew?

And finally, there is all that oil. Yes, other folks have a lot too, but no one can produce it more cheaply than the Saudis, and that is a lesson they are once again teaching the other producers: A price war is the oil-patch equivalent of a contest to see who can hold his breath the longest. Those contests are painful for the Saudis--but much more painful for the rest of the world's producers. It's that geology again.

Midway through my visit I had a late-night interview with Alwaleed bin Talal, the billionaire prince who became a media star in the '90s for his big bets on companies like Citicorp and Compaq. Sitting in his office in Riyadh, a bank of no fewer than eight TVs on the wall to his left, he expresses no doubt that the ill will toward the kingdom generated by Sept. 11 will fade, and, like the sheikh I met in the desert, he believes there is no threat on the horizon to the continued rule of his family. Not even Osama bin Laden or whoever may come in his wake? "None," he says.

Before I leave, he gives me copies--printed off the Internet--of that day's Wall Street Journal and International Herald Tribune. It's a nice gesture. You can't get either on the same day in Saudi Arabia, because the censors get them first, cutting out the nasty things the foreigners say about the kingdom. In the taxi on the way back to hotel, I flip through the Journal, coming eventually to the editorial page. On it is a piece by an economist, headlined WE CAN LIVE WITHOUT SAUDI OIL. There are a lot of articles written like that these days. If only they were true. The Prince has circled the headline, and gleefully written, in big letters next to it, what amounts the kingdom's trump card, its bottom line before Sept. 11 and after. It is, alas, our bottom line too. In big green letters, it reads, simply: NO YOU CAN'T.

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